What is a Chargeback Rate & Why You Should Care About It
As an online seller, chargeback rates are one of my biggest concerns. I want to highlight why this measurement is so crucial.
I’ll explain what this rate is, why it matters, how to calculate it, and other key details.
Let’s begin with what a chargeback rate is.
Key Takeaways
- Calculate your rate by dividing total chargebacks by transactions, then multiply by 100.
- Keep your chargeback rate under 0.65% to avoid penalties.
- The travel industry averages between 0.89% and 1.10%.
- The restaurant industry averages 0.12%.
- Card networks don’t make it easy to track your rate.
One effective way to lower your chargeback rate is by using chargeback alerts. We offer alerts from all providers and make integration simple.
What is a Chargeback Rate?
A chargeback rate shows how often customers dispute purchases compared to total sales. It's calculated by dividing chargebacks by transactions, then multiplying by 100. Some may also call this a “chargeback ratio.” High rates can increase fees and risk merchant account closure.
Sellers and card brands use this metric to check if you’re getting too many chargebacks. If your rate is high, penalties will follow. We’ll talk about these in a bit.
But first:
Chargeback rates differ from refund rates. Refund rates count how many refunds a customer gets from your business.
Aren’t refunds the same as chargebacks? Nope.
Think of chargebacks like forced refunds by card networks that come with extra fees. This isn’t a great way to explain it, but it’s the simplest way to do so.
Find more differences between chargebacks and refunds here.
Let’s look into what rate you should have.
Summary: This rate helps you know how many chargebacks you have.
What is a Good Chargeback Rate?
A good chargeback rate is under 0.65%, meaning less than one dispute per 100 transactions. This target helps businesses avoid penalty fees from payment processors. Industry standards may vary, affecting what's considered an acceptable rate.
At 0.65%, you’ll enter Visa’s Early Warning program, which has no direct consequences but puts you on their radar.
If you use Visa 3D Secure, aim to stay under 0.50% to avoid that program’s Early Warning tier. Though, this only applies to US merchants.
At the very least, keep your rate below 0.90% to avoid Visa’s Dispute Monitoring program, which comes with penalties.
Why aren’t I talking about other monitoring programs?
Because they’re more lenient.
What a good rate to stay at ties in with monitoring programs, which we’ll circle back to.
For now, let’s see what the average rate for each business is.
Summary: Keep your rate under 0.65%.
Average Chargeback Rate by Industry
Here are the average chargeback rates by industry:
Here’s why the travel industry might have the highest chargeback rates:
- Multiple vendors: Bookings involve airlines, hotels, and others, each with different terms. This causes confusion and disputes.
- Dynamic pricing: Changing prices and fees can confuse customers, leading to misunderstandings.
- Hidden fees: Extra charges, like baggage or resort fees, often frustrate customers and cause disputes.
- Weather issues: Canceled or delayed flights and activities due to weather can lead to chargebacks.
- Overbooking: Denied services customers already paid for often result in chargebacks.
- Friendly fraud: Customers may dispute charges to reverse purchases they regret.
As someone with experience in the travel industry, I understand why these chargebacks happen. Refund processes for many airlines can feel like a nightmare.
I stuck with it and didn’t need a chargeback.
Training and education sectors often deal with digital goods or scam products from “gurus.” I’d imagine that many customers aren’t satisfied with what they received and then demand their money back.
See this guide for more details on chargeback rates by:
- Countries
- Industries
- Price points
- More
I’d love to go over all of these and provide input, but we need to move onto calculating chargeback rates.
How Do You Calculate Your Chargeback Ratio?
You’d calculate this rate by dividing the total number of chargebacks by the total number of orders in a period. Then, multiply the answer by 100. The periods in which you’ll multiply numbers will vary by card brand.
More on that in a second.
Let’s say you had 1,200 orders in a month and 50 chargebacks from the previous month. To calculate the chargeback rate, divide 50 by 1,200, which equals 0.041. Multiply by 100 to get 4.1%.
That’s 4.1% of your orders resulting in chargebacks, putting you well above acceptable thresholds.
I’ll circle back to this.
As for the periods when you’ll calculate the rates, here are examples of how card brands would calculate them:
- Visa: Current month’s orders and disputes from the previous month.
- Mastercard: Previous month’s orders by chargebacks from the current month.
Most other issuers don’t specify their periods.
If you're unclear about a “calendar month”, it refers to the period from the first to the last day of a specific month. A regular month just refers to any 30-day interval.
Is there anything that influences these rates?
Summary: Divide chargebacks by orders then multiply the answer by 100.
What Influences Your Chargeback Rate?
Here are the factors that’ll influence your chargeback rate:
- Number of orders in a month.
- Card network rules.
- Fraudulent activity.
- Whether you have a record of chargebacks.
- First chargebacks.
- Average dollar value of your orders.
What the heck is a “first chargeback?”
A "first chargeback" is the first chargeback a cardholder files against you.
Some networks allow second chargebacks if the first doesn’t succeed, but those won’t count against your chargeback rate.
Visa calls these second chargebacks "dispute response reversals," while Mastercard labels them as "arbitration chargebacks."
If you’re a smaller company with lower average dollar value orders and fewer orders, card brands may cut you slack if your rates get high.
I don’t work for any card networks and can’t guarantee this. I found this information online.
And I’ve kept you waiting long enough. Let’s see what happens when your rate is too high.
What Happens if My Chargeback Rate Is Too High?
High chargeback rates trigger penalties from payment processors. Merchants face account restrictions, monitoring programs, or termination. These actions damage business finances and reputation. Most processors set strict limits on acceptable chargeback ratios.
Learn more about every monitoring program here.
Visa and Mastercard impose extra fees, which can reach thousands of dollars each month. Staying in these programs too long can result in losing your ability to process payments altogether, crippling your business.
You may also end up on the MATCH list, making it impossible to open accounts with other banks.
Some networks, like Stripe, may apply reserves to your account, holding portions of transactions for future disputes.
More about the penalties here.
And check out these guides for more information on penalties from other payment processors:
They all also come with pretty nasty penalties.
Thus, it’s important to keep your rates low.
Wait:
How do you even find these rates?
Summary: You’ll end up in monitoring programs or with restricted account access.
How Do You Find the Chargeback Rate?
Card networks don’t offer direct ways to track your chargeback rate. You’ll need to calculate it yourself. Payment processors, however, may provide access to this information.
To find it on Stripe, you’ll navigate to Analytics on your dashboard and look for Disputes.
Here’s what that would look like:
Source: Stripe
Folks who use PayPal will navigate to the Resolution Center and look for your dispute rate.
These don’t show you which card networks the disputes are from. Just your overall rate.
Amazon uses an Order Defect Rate instead of chargebacks.
To view it, go to:
Seller Central > Performance (sidebar) > Account Health
Look under "Customer Service Performance" to find your Order Defect Rate.
See the Amazon chargeback guide I linked for more information on finding these rates.
These rates, along with chargebacks, stink. How do I reduce them?
How Do You Lower Chargeback Rates?
Here are some of the best ways to lower chargeback rates:
- Proactive alerts: Get notified of disputes early for quick resolution.
- Clear billing: Use recognizable company names on credit card statements.
- Enhanced security: Implement 3D Secure for added fraud protection.
- Transparent refunds: Provide easy-to-follow refund policies.
- Detailed product info: Offer accurate descriptions, photos, and shipping times.
- Purchase confirmation: Send detailed receipts immediately after purchase.
- Real-time inventory: Maintain accurate stock levels to avoid overselling.
- Comprehensive shipping: Provide detailed tracking and updates.
I’ll explain these in depth throughout the following sections.
See this guide for more ways to prevent chargebacks.
Otherwise, let’s get this started.
1. Chargeback Alerts
Use alert systems to notify you when a customer initiates a dispute. This lets you resolve the issue quickly and possibly prevent the chargeback.
There are 3 different alerts; CDRN, RDR, and Ethoca.
Learn about the differences here.
Access these alerts by contacting Ethoca or Verifi. Or you could get them through resellers, which offer every alert in one area.
We provide these alerts and at volume pricing. Making it so you won’t lose all your money trying to prevent chargebacks.
2. Clear Billing Descriptors
Ensure the company name on credit card statements matches your brand name. Use descriptors that customers will recognize to prevent confusion.
3. Enhanced Security Measures
Implement robust fraud prevention tools like 3D Secure authentication.
This additional security requires customers to verify their identity beyond entering card details. Reducing fraudulent transactions and making it harder for customers to falsely claim unauthorized purchases.
4. Transparent Refund Policy
Display clear return policies on your website and provide step-by-step instructions for requesting refunds. When customers know they can easily get their money back through proper channels, they're less likely to file chargebacks.
5. Detailed Product Documentation
Provide comprehensive product descriptions, accurate photos, and clear shipping timelines.
Managing customer expectations from the start prevents disputes arising from misunderstandings about product features, delivery times, or appearance.
6. Purchase Confirmation Emails
Send detailed receipts immediately after purchase, including order details, shipping information, and customer service contacts.
This does the following:
- Creates a clear paper trail
- Reminds customers of their purchase
- Provides an easy way to reach out with concerns
7. Real-Time Inventory Management
Maintain accurate, up-to-date inventory systems to prevent overselling.
When customers purchase items that are actually out of stock, they're likely to initiate chargebacks. Implementing automated inventory tracking ensures
8. Comprehensive Shipping Updates
Send shipping information with carrier names, tracking numbers, and estimated delivery dates. This reduces anxiety-driven chargebacks.
That’s a wrap.
Conclusion
Keep your chargeback rate below 0.65% to avoid monitoring programs. Staying under 0.65% will keep you off Visa’s radar.
Using chargeback alerts is one of the best ways to reduce rates.
We can help you get started with alerts right away.
